The Science of Success
Author: Charles Koch, Koch Industries, Inc.
Reviewer: Cecil Bohanon, Ball State University
Economics
often seems at
odds with much of
the undergraduate
business curricu-
lum. Economics
courses focus on
behavioral laws
and principles that
are not just applied
to business decision making, but to
numerous social phenomena. Econo-
mists are usually uninterested in the
actual internal operation of a business.
Rather, they see a firm as a “black box”
subject to the universal logic of well
developed principles of cost theory (e.g.
the law of diminishing returns) and to
the rigors of market competition. Firm
specifics are only interesting as illustra-
tions of general principles or as spring-
boards for additional refinements to
cost theory.
The actual nuts-and-bolts of run-
ning a firm is supposed to be covered in
the management and the other applied
courses of the business curriculum.
These courses are typically taken after
the business student has completed his
or her economics courses. Sometimes
management courses build on economic
principles, but often there is little to no
linkage. Part of the reason is that cer-
tain aspects of management and other
applied business disciplines rely on psy-
chology or sociology for their intellec-
tual foundation. In other cases, instruc-
tors are simply uncomfortable with
economics, preferring more eclectic,
institutional, anecdotal or atheoretical
approaches to their instruction. There is
no real theory of business success, it is
argued; the best we can hope to accom-
plish in business education is to offer
a catalog of successful businesses and
74 Spring 2009 • Vol. 24, No. 1
alert students to issues important to the
contemporary business community.
It is not surprising that business stu-
dents often graduate with the notion that
theories, especially economic ones, are
devoid of practical business implications.
They believe business success is ultimately
pragmatic and not contingent on the
sound mastery of any set of principles.
Charles G. Koch’s The Science of Suc-
cess thoroughly rejects this dichotomy
in business education.1 Although eco-
nomics and applied business disciplines
are not identical fields of study, good
economic theory and good manage-
ment practice are inextricably linked by
certain immutable principles that are
found primarily, but not exclusively, in
economic theory.
Koch is the CEO of Koch Industries
of Wichita, Kansas. The firm’s origins
trace to his father, Fred C. Koch, who
“developed an improved thermal crack-
ing process for converting heavy oil to
gasoline” (p.6) around 1925. In 2007
Forbes magazine listed Koch Industries
as the largest private company in the
United States with annual revenues of
$90 billion and 80,000 employees.2
Koch believes that the same prin-
ciples that direct a society to economic
prosperity can be used to direct a busi-
ness enterprise to growth. More impor-
tant, he makes a compelling case for
his argument and offers his company’s
resounding success as empirical evi-
dence. This approach is embedded in
what Koch Industries calls Market-
Based Management® or MBM®, which
the firm has trademarked and uses for
training all Koch employees.
MBM® draws on the economic
theories of such free market thinkers
as Adam Smith, Joseph Schumpeter,
Fredric Hayek, Ludwig Von Mises,
and Vernon Smith; as well as philoso-
pher Michael Polyani and management
expert W. Edward Deming. These theo-
ries are tempered and expanded by Koch
Industry’s 80 years of experience and by
Koch’s near 50-year tenure with the
company. What emerge are the appli-
cations of economic principles such as
comparative advantage and sunk costs
(to name a few) to management deci-
sion making. It is clear that principles
can be guides to decision making with-
out becoming inflexible creeds or empty
platitudes. Perhaps the two quotes pre-
ceding the second chapter of the book
best illustrate this view: The first from
Ralph Waldo Emerson:
The man who grasps principles can
successfully select his own methods.
The man who tries methods, ignor-
ing principles, is sure to have trouble.
followed by a quote from the author’s
father, Fred C. Koch:
…you must know your stuff. There is
no substitute for this.
Koch’s book must be read to be
understood. A superficial reading can-
not do justice to the analysis. At one
level, this is a shortcoming of the book.
The five dimensions and three applica-
tions of MBM® (pp. 48-49) generate
fifteen cells of analysis which are not
well developed later in the book. The
book’s chapters are putatively about
the five dimensions of the manage-
ment approach, but they further morph
into numerous subheadings that make
the analysis unwieldy. But at another
level, because the book is trying to be
a comprehensive curriculum for Koch
employees, such detail is necessary and

appropriate. For the goal here is daunt-
ing—it is to shape the culture of an
80,000 employee company where the
real world practice of business undoubt-
edly becomes unwieldy.
I will not, therefore, attempt to
summarize the book using the author’s
framework—but rather, will offer some
insights that I hope encourage the
work to be examined by other business
educators, and offer some comments
on how MBM® might fit into busi-
ness education.
Koch believes that the legitimate
social goal of the firm is profit maximi-
zation. He understands that profits mea-
sure the social contribution of the firm,
and that profits are the legitimate reward
to the owners of the firm that transform
resources from lower valued to higher
valued uses. But he also understands that
the socially beneficial effects of profit
maximization are only certain to accrue
when the firm is subject to both legal and
moral constraints. All employees in the
MBM® firm must obey all the laws of
the jurisdictions in which it operates all
of the time—period. Moreover, all forms
of coercion, intimidation or fraud are
forbidden in the MBM® firm’s internal
or external operations. All employees
work to develop the habits of transpar-
ency, trustworthiness and humility. Cen-
tral to MBM® is the development of an
ethical culture in the company.
With these important provisos in
mind, the single-minded goal of MBM®
is to maximize the difference between the
firm’s revenue and its opportunity cost.
Revenue is enhanced by creating value for
customers. Opportunity cost is reduced
by discovering new ways of combining
resources more efficiently. MBM® rec-
ognizes that economic profits in the firm
are always tenuous because profits attract
competitors. However, more relevant
than the competition of the rote imitator
is the competition from new substitutes,
new technologies, new sources of supply,
and new types of organizations that are
constantly evolving in an open economy.
In the long-run, the incumbent candle
maker’s competition did not come from
lower cost candle makers, but from light
bulb producers. This implies that the
process of value enhancement and cost
reductions are subject to what economist
Joseph Schumpeter described as the
“waves of creative destruction” central
to a market economy. In MBM® it is
important for decision makers not only
to anticipate these dynamic trends, but
to try to harness and drive the process of
creative destruction inherent in capital-
ism to promote the long-run profitabil-
ity of the firm.
A related component of MBM® is
the constant examination of the lines of
business of the firm. For each and every
revenue source the company must con-
stantly ask: is this the market in which
our company has a comparative advan-
tage? Would our resources be better
directed pursuing other revenue sources
from other products? This means it is
quite common for the MBM® firm to
sell existing lines of business to other
companies and buy new lines of busi-
ness from other companies. The simple
rule is: if the expected net present value
of a current business line is greater in
another firm than in Koch Industries,
then sell it to the outside firm. If the
expected net present value of a business
line is greater in Koch Industries than
in an outside firm, seek to buy it from
the outside firm.
In all this, Koch makes clear that you
will make mistakes: MBM® anticipates
error. In addition to paying careful atten-
tion to market generated price and profit
signals, MBM® is constantly looking
for market-like methods of feedback
that compile impersonal information
from a number of sources and com-
municate the information effectively to
the relevant decision maker. ( Just who
is the appropriate decision maker in
the firm is yet another crucial question
addressed in MBM®.) Another model
MBM® tries to imitate is Michael
Polyani’s “Republic of Science.” In a
well functioning scientific community,
knowledge is shared; theories are vetted,
constructively criticized and empirically
examined. All bodies of knowledge,
operating procedures and protocols
are continually adjusted, expanded and
Bohanon
improved. Conflict in the community
is not avoided but channeled to open,
honest, and productive discussion that
in the long run lead to effective results.3
In Koch’s words, “if you find you are
rarely challenging or being challenged
by views, then something is wrong.”
(p.116). In short, MBM® is about prin-
ciples and processes; it is founded on
static truths but it is ever dynamic in its
actual implementation.
One hundred years ago, colleges of
business were the new kids on the block
in the university. Economics was widely
(although not uniformly) seen as the
intellectual foundation of the newly
emerging business school curriculum.
As Roswell C. McCrea (dean at a num-
ber of early university business schools
including Wharton and Columbia)
argued in 1926: “Without the presence
of economics in some vital form…the
school of business is likely to degener-
ate into a detailed description of busi-
ness organization and procedure with
no organizing principle.”
Yet early on it was recognized that a
university level business education must
be more than the study of econom-
ics. As business colleges grew, applied
business disciplines and sub-disciplines
quickly proliferated. The knowledge
bases and methodologies of the busi-
ness disciplines diverged and depart-
ments in business colleges became
academic “silos” with little interdepart-
mental interaction.
A contemporary criticism of under-
graduate business education is that
b-school graduates are themselves
“siloed” by major. As one business dean
lamented, the business student “wishes
in far too many cases to make himself
into a narrow specialist”4—to further
paraphrase—‘they have no conception
of the interrelated nature of the busi-
ness enterprise.’ In large measure this
is because such interrelations are absent
from their curriculum. This lack of cur-
riculum integration in colleges of busi-
ness is nothing new. Indeed, the dean
quoted above was Wallace C. Don-
ham, the founding dean of the Harvard
School of Business who opined on the
Spring 2009 • Vol. 24, No. 1 75
Bohanon
“silo” problem (without using the phrase)
in 1922. There were then and are now a
number of ways of addressing this prob-
lem of curriculum integration. I want to
suggest that Koch Industries Market-
Based Management® offers an appeal-
ing model for overcoming this persistent
problem in business education.
To make the point bluntly, suppose
a generic college of business decided to
adopt MBM® as the foundation for its
curriculum. Who in the college would
have to change what to make the new
curriculum work? As a 30-year veteran
instructor of economics in a business
college I know what the first response
of my business school colleagues both
inside and outside the department of
economics would be—Hell, no!
The initial reaction of management
and marketing professors is they would
resent being beholden to the world-
view of the economists. However, if an
MBM® approach were not imposed
by an imperial decree, and if the applied
business discipline were part of, indeed
crucial to the process of identifying eco-
nomic (and other!) principles included in
the new curriculum, (and it is clear that
an MBM®-based university curriculum
expects mutual respect among all its par-
ticipants), then many business professors
in the applied disciplines may well buy in.
In addition, if an MBM®-like curric-
ulum were adopted at a business school,
the actual teaching of economics (and
other foundational courses) would also
Deans of AJB Sponsor Schools
The American Journal of Business is supported by nine schools of business and their deans. Every school is AACSB-accredited.
From left: Rodney Davis, Ball State; Rodney Rogers, Bowling Green; D. Michael Fields, Central Michigan; Roger Jenkins, Miami; Denise Shoen-
bachler, Northern Illinois; Hugh Sherman, Ohio; Thomas Gutteridge, U of Toledo; Raj Aggarwal, U of Akron; David Shields, Western Michigan
76 Spring 2009 • Vol. 24, No. 1
have to change. Business examples and
cases would be expected in the prin-
ciples of economics courses instead of
optional add-ons. The teaching econo-
mist would foresee and foreshadow the
way her marketing and management
colleagues would use the principles
developed in economics classes to dis-
cuss real world business decision mak-
ing. This likely implies that an under-
graduate economics for business course
be developed that is somewhat different
than its liberal arts counterpart, but so
be it.5 A lively component to such a cur-
riculum might be business immersion
experiences that go beyond the sum-
mer internship—one where groups of
students apply solid principles to actual
real world problems.
So here is the model: foundational
principles that represent recurring and
eternal truths are presented and students
are expected to have fluent command
of them. Students are then expected to
augment knowledge and apply prin-
ciples to a variety of business functions
and business issues as they integrate
good theory and good practice. I think
Koch’s analysis offers a genuine entre-
preneurial opportunity here for some
enterprising business college faculty.
Who knows, maybe yours?
Notes
1. The dichotomy is not new. The gap
between theory and practice was recently
emphasized in management education
in Bennis and O’Toole (2005), however,
Bohanon (2008) has pointed out that this
tension, along with a host of other busi-
ness education issues, have persisted since
the formation of business colleges in uni-
versities at the turn of the 20th century.
2. www.forbes.com/lists/2007/21/biz_pri-
vates07.Americas-Largest-Private-
Companies.
3. I am reminded of Wikipedia. Although
this new source of information is far
from infallible it is an example of an open
and self-correcting scientific community.
Despite academics cries to the contrary,
for many purposes Wikipedia is a low
cost and relatively accurate method of
information retrieval.
4. Both quotes are found in Bohanon (2008).
5. Interestingly, under an MBM® approach
this introductory business microeco-
nomic course may be more philosophi-
cal and less quantitative than the stan-
dard liberal arts version of introductory
microeconomics.
References
Bennis, W.G. and J. O’Toole. 2005. How
business schools lost their way. Harvard
Business Review 83(5): 96-104.
Bohanon, C.E. Persistant themes in colleges
of business. Journal of Education for Busi-
ness 83 (4): 239-245.
Koch, Charles. 2007. The Science of Success:
How Market-Based Management Built
the World’s Largest Private Company.
John Wiley & Sons, Inc. Hoboken, New
Jersey.